7 Things You Must Know About Canada’s Recreational Marijuana Legalization

We’re now just 46 days away from history. On June 19, after nearly two weeks of back-and-forth banter between the House of Commons and Senate, Canada’s Parliament passed bill C-45, which is officially known as the Cannabis Act. In doing so, it paved a path for Canada to become the first industrialized country in the world to have legalized recreational weed as of Oct. 17, 2018.

What exactly will this mean for consumers, the Canadian pot industry, and investors? Let’s have a closer look at the seven things you should know as we barrel toward adult-use legalization.

1. Recreational marijuana is still illegal until Oct. 17

The first thing you should probably realize is that marijuana is still, technically, not legal in Canada. While law enforcement has essentially begun treating the substance as if it’s legal, it’s not to be used for adult consumption, or go on sale in licensed dispensaries, until the Oct. 17 launch date.

Why the nearly fourth-month gap between the June 19 passage date and the Oct. 17 launch date? Namely, it’s to give Canada’s 13 provinces and territories the time they need to get their regulatory infrastructure in place, as well as allow growers to get their product into licensed dispensaries. Canadian regulators are intent on avoiding a cannabis shortage following Oct. 17, and this extra time could afford growers the opportunity to stockpile weed in domestic markets.

2. Not all forms of cannabis will get the green light when legalized

When the green flag waves on Oct. 17, it’ll only be for the dried flower and various forms of cannabis oils, such as softgel capsules. Alternative forms of cannabis consumption, including edibles, vaporized cartridges, concentrates, and infused beverages won’t be legal on Oct. 17.

The main reason why is simplicity. Lawmakers in Canada were generally in agreement that recreational marijuana should be legal, but other factors, such as form of consumption, were proving to be too much of a monkey wrench. So as not to hold up Prime Minister Justin Trudeau’s promise of pot legalization, lawmakers pushed through a bill that legalized the flower and oils, and allowed regulators to revisit and amend the existing law at any point.

According to most industry analysts, Parliament is widely expected to take up discussion on expanding the means of cannabis consumption in 2019.

3. No, you can’t bring marijuana back from Canada, or vice-versa

Since adult-use marijuana is about to be legal in Canada, you can bring U.S. weed into Canada, or Canadian weed back into the U.S., right? (Buzzer sound) Wrong.

It’s important to understand that no matter what laws individual U.S. states have passed regarding marijuana, federal law will supersede those state laws when it comes to border security. Since the U.S. federal government has stood firm on cannabis as a Schedule I drug — i.e., wholly illegal, prone to abuse, and having no recognized medical benefits — it would be a fineable offense to bring cannabis back from Canada. Not to mention, the border patrol would confiscate what marijuana you’re bringing back.

By a similar token, since U.S.-grown cannabis isn’t within Canada’s regulated sphere of licensed production, Canada could fine and confiscate users who bring pot into the country. It’s also possible that either country could ban citizens from coming back for such an offense (i.e., a U.S. citizen being barred from Canada, and vice-versa).

4. Every province enforces the Cannabis Act differently

Although the Cannabis Act is a broad-based law that’s designed to allow adults over the age of 18 to purchase recreational pot and possess up to 30 grams of cannabis on their person, it’s being implemented differently, depending on the province or territory.

For example, Alberta and Quebec will allow adults 18 and over to purchase marijuana come Oct. 17. However, Canada’s 11 other provinces and territories require adults to be aged 19 and over.

Another difference can be found in how the product is being sold or grown. In Quebec and Manitoba, home-growing of marijuana won’t be allowed. In most other provinces it will be allowed. Similarly, government-run stores in Ontario and New Brunswick will operate their licensed dispensaries, while in other provinces, such as Saskatchewan, privately run businesses will operate retail locations.

5. Yes, it will be taxed, but at a much lower rate than alcohol

While the legalization of recreational marijuana is considered a major step forward for enthusiasts, it’s no lock to meet lofty sales expectations due to federally imposed excise taxes that amount to about 10%. Remember, the black market has no excise taxes to pay, nor store rent to cover, and no licenses or permits to pay or wait for. This means the black market, by nature, should continue to be able to undercut the legal market on price. This could change as economies-of-scale come into play when larger growers begin to realize significant cost savings, but we’re probably still a year or two away from that happening. Thus, it’s possible that the black market hangs onto a larger percentage of existing sales than most folks realize.

If there is a positive here, it’s that the 10% excise tax that consumers will pay on recreational weed is considerably less than the excise tax Canadians are currently paying on beer, wine, and spirits, which ranges from 50% to 80%.

6. Foreign markets are likely to play a big role in Canada’s weed market

Even though Canada is the country legalizing recreational weed, this is actually more of a global event, whether you realize it or not.

There are around 30 countries in the world that have legalized medical cannabis, and a vast majority of these nations have nascent or nonexistent grow facilities. They’ll be counting on what few legal countries are able to export cannabis, such as Canada, to provide them with medical weed for patients.

Just how important will foreign markets be for Canadian growers? By my own estimation, annual production could potentially top 3 million kilograms by 2020. By comparison, Health Canada has suggested that domestic Canadian demand could come in around 1 million kilograms, with other provincial and Wall Street estimates erring a bit lower (closer to 800,000 kilograms). This infers the possibility of around 2 million kilograms of annual domestic oversupply by the turn of the decade that’ll need to find a home in abroad markets. Yeah, they’re going to be a big deal.

7. This is a big money business

Lastly, it’s important to recognize that marijuana is indeed about to become a very big money, and viable, business. Though estimates vary, recreational marijuana could generate upwards of $5 billion in annual added revenue when fully ramped up.

So, where does this money go?

In terms of aggregate production, it’s going to be tough for any company to top what Aurora Cannabis(NASDAQOTH:ACBFF) is expected to bring to the table. Since closing on its all-share acquisition of MedReleaf for $2.5 billion, Aurora Cannabis now expects to generate over 570,000 kilograms per year when at full capacity. Assuming my 2020 prediction is remotely close, Aurora will account for about a sixth of Canada’s aggregate production. However, with a keen focus on the medical side of the market, Aurora Cannabis is probably going to be angling more toward medical exports than domestic retail sales.

But aggregate production isn’t everything. If you’re looking for a reasonably priced pot stock with the potential for exceptionally low per-gram grow costs, I prefer Atlantic-based OrganiGram Holdings(NASDAQOTH:OGRMF). OrganiGram is employing a three-tiered growing system at its only grow facility in Moncton, New Brunswick. This will allow up to 113,000 kilograms of annual production spanning just 490,000 square feet — that’s an exceptionally cost-effective use of space. Plus, with a focus on high-margin alternative cannabis products like oils, OrganiGram should generate above-average margins relative to its peers.

There’s no doubt the weed industry will see green, but figuring to which marijuana stocks will truly come out ahead simply isn’t as easy.